Chief Yahoo has some breathing room -- for now

Commentary: Mild-mannered Yang is more confident than ever as CEO

SAN FRANCISCO (MarketWatch) -- Jerry Yang sounded downright confident on the company's conference call with analysts earlier this week, despite the lackluster results for the Internet giant's second quarter.

He even cracked wise with investors, noting lightly at the onset of the call that Yahoo Inc.
YHOO
had "quite a disclaimer." He chimed in as executives took questions, answering more than is his custom and sounding more upbeat than he had all year.

"Frankly I think Yahoo's ability to perform is especially impressive in light of the extraordinary events surrounding the company this year," Yang said in his preamble.

Yang has never been the swaggering kind. Today, though, this unassuming Chief Yahoo is clearly walking with his head held higher. In recent weeks, the CEO has transformed from his mild-mannered, Bruce Wayne-like self into Batman, saving his company from the clutches of two villains: the evil empire Microsoft
MSFT, +1.25%
and a Joker in the form of activist investor Carl Icahn.

It is Yang's finest moment in the year since assuming control of the company he co-founded with fellow Stanford University student David Filo in 1994. Stepping in for Terry Semel last year, who resigned amid investor outrage over his pay and Yahoo's waning performance, Yang has always seemed to prefer geeky engineers to executives, press, analysts and investors.

Few predicted that Yang would be victorious in the face of an offer that represented a 62% premium to Yahoo's stock price.

Assurances

But quiet man Yang also happens to be a skilled poker player. At the negotiating table with Microsoft -- just days after Yang's wife gave birth to the couple's second child -- he drew upon his ability to read another player's hand. He calmly held his ground and asked for certain assurances of a deal, according to a person close to Yahoo. Then the software giant abruptly scurried away.

"He is a very modest, humble guy who also has a lot of competitive fire in him," said this person, who asked not to be named.

Bill Miller, chief investment officer at Legg Mason, one of Yahoo's biggest shareholders with a 4.4% stake, sided with Yang & Co. as the proxy fight approached. He backed Yahoo's assertions that the company never received a real second offer in writing, joining the poker player in calling Microsoft's hand a bluff. "If Microsoft wants to acquire Yahoo, it can make the terms and conditions of its offer public," Miller said last week.

After one villain was dispensed with, the second one was handily dispatched. Just a couple weeks ago, Icahn, the big, feared former corporate-raider-turned-activist-investor was calling for Yang to step down. But last week, he accepted the olive branch offered by Yang and Chairman Roy Bostock -- the less-threatening position of three seats on the Yahoo board.

In his blog, "The Icahn Report," Icahn explained that even though "many large shareholders supported me and my slate for the board, they were nervous about having a complete change of control."

The billionaire investor also likely realized what many of his critics had been saying all along: He was in over his head if he thought he could storm Silicon Valley and quickly restore the polish at the embattled Web portal, which is still struggling to redefine its business following the onslaught from Google Inc.
GOOG, +0.57%

Breathing room

For now, the pressure has eased off Yang, and, consequently, President Sue Decker and their tense boardroom. After Tuesday's disappointing quarterly report, Yahoo's stock actually ticked up in after-hours trading and in the following session.

The shares rose as high as $22.48 Wednesday, and have been holding above the low this year of $19.18, which was set on Jan. 31, the day Microsoft swooped in.

"Investors seem willing to give Yahoo the chance to prove its case," said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. "And so the investment controversy has switched back to Yahoo's strategic and operational initiatives."

Icahn's proxy battle, long looming over the run-up to the annual meeting set for next Friday, is history. Even so, the shareholder advisory firms, which consult with investors and make voting recommendations in proxy fights, are now backing Yang. On Thursday, RiskMetrics Group's Institutional Shareholder Services endorsed the CEO and the incumbent board.

Glass Lewis & Co., which called for the ouster of Bostock and two other board members over compensation and severance pay, supported Yang.

Chris Cernich, a senior research analyst at Proxy Governance, another advisory firm, noted that during Yahoo's road show with investors, Yang's passion for the company was obvious.

"I know he is the founder and wants them to succeed," Cernich said. "But I think it's beyond being the founder. I think he is just really interested in making this thing work." Perhaps Yang, like super-hero-in-disguise Bruce Wayne, had been quietly biding his time, waiting for the right moment to emerge from the Bat Cave.

Pressure to deliver

Yang's villain-fighting strength may only go so far. He's bought his team more time, but it may be only a quarter or two before investors start to fidget again.

"If something significant has not transpired by January, there is going to be a lot of pressure to have Jerry take on a totally different role, if not step down and allow some new blood in," said Mukul Krishna, an analyst with Frost & Sullivan's digital media practice.

The company is facing the same issues: Google is still eating Yahoo's lunch in search. Yahoo is going forward with its strategy of outsourcing part of its search business to Google, a deal it expects to pass regulatory muster by next year.

Yahoo is also working on improving its display advertising. Decker highlighted Yahoo's deals with eBay Inc.
EBAY, +1.53%
and a project with a group of newspapers, in pilot now, testing a new online display ad platform, which aims to make it easier and to rapidly put up an online display ad campaign that runs across multiple publishers.

But there are seemingly many untapped opportunities within Yahoo that have some analysts stewing and debating. Some of its Asian assets, including its 40% stake in Alibaba.com, were estimated at about $10 billion in the public markets, Chief Financial Officer Blake Jorgensen told analysts on Tuesday. Selling off these assets could raise huge wads of cash. To a global Yahoo, however, they may be worth more as partnerships.

Another sticking point is the company's seeming inability to make money from some of its other properties, including ventures in the social media sector. Its Flickr photo franchise has become the de facto photo-sharing app on social networks like Facebook and MySpace, but it has yet to become a serious revenue generator, despite its popularity and millions of users.

Fair point. In the meantime, let's allow the Chief Yahoo to bask in his glory for a few minutes after successfully defending Gotham City against the unwanted advances of would-be predators.

But with a host of other threats nipping at their heels, Jerry Yang and his lieutenants will need to move much faster than they have in the past. They need to show investors what exactly was worth fighting for in remaining independent company, and how they can reap the benefits.

With the distractions from those who Yang sees as evildoers out of the way for now, his executives must fully focus their attention on Yahoo's own agenda. But Yang knows it's not going to be easy. After all, a superhero's work is never done.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.